With a daily loss of -10.03%, a 3-month loss of -19.73%, and an Earnings Per Share (EPS) (EPS) of 2.5, Kellogg Co (K, Financial) raises an intriguing question: Is the stock modestly undervalued? This article aims to answer this question by delving into a valuation analysis of Kellogg Co. We invite you to join us in this exploration of the company's financial performance and market value.
Company Introduction
Founded in 1906, Kellogg Co is a leading global manufacturer and marketer of cereal, cookies, crackers, and other packaged foods. Its offerings are manufactured in 21 countries and marketed in more than 180 countries. Its product mix includes well-known brands such as Special K, Frosted Flakes, Froot Loops, Rice Krispies, Pop-Tarts, Eggo, Kashi, and Morningstar Farms. The firm added the Pringles brand to its mix in 2012. Sales outside its home turf account for just north of 40% of Kellogg's consolidated sales base. The firm intends to split its global snacking arm from its North American cereal segment by the end of calendar 2023.
At its current price of $53.54 per share, Kellogg Co has a market cap of $18.30 billion. When compared to the GF Value of $73.16, it appears that Kellogg Co's stock may be modestly undervalued.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. According to our method, Kellogg Co's stock appears to be modestly undervalued. This implies that the long-term return of its stock is likely to be higher than its business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, a careful review of a company's financial strength is essential before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can provide a good initial perspective on the company's financial strength.
Kellogg Co has a cash-to-debt ratio of 0.04, which ranks worse than 89.01% of 1784 companies in the Consumer Packaged Goods industry. Based on this, GuruFocus ranks Kellogg Co's financial strength as 5 out of 10, suggesting fair balance sheet.
Profitability and Growth
It is less risky to invest in profitable companies, especially those with consistent profitability over the long term. A company with high profit margins is usually a safer investment than those with low profit margins. Kellogg Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $15.90 billion and Earnings Per Share (EPS) of $2.5. Its operating margin is 10.41%, which ranks better than 74.82% of 1827 companies in the Consumer Packaged Goods industry. Overall, the profitability of Kellogg Co is ranked 7 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Kellogg Co is 4%, which ranks worse than 59.01% of 1710 companies in the Consumer Packaged Goods industry. The 3-year average EBITDA growth rate is -3.1%, which ranks worse than 65.17% of 1516 companies in the Consumer Packaged Goods industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Kellogg Co's return on invested capital is 7.92, and its cost of capital is 4.8.
Conclusion
In summary, the stock of Kellogg Co (K, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 65.17% of 1516 companies in the Consumer Packaged Goods industry. To learn more about Kellogg Co stock, you can check out its 30-Year Financials here.
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